Psm Holding Corp. v. National Farm Financial Corp., 884 F.3d 812

Background

PSM Holding obtained a $40M judgment against National Farm (owner of BAIC); National Farm failed to post an appeal bond and PSM executed on the judgment, taking possession of BAIC in 2008.
While owning BAIC, PSM entered an intercompany quota share reinsurance agreement (QSA), operated the company, incurred expenses, and later returned BAIC after the Ninth Circuit reversed the underlying judgment in 2009.
On remand the district court ordered return of BAIC to Defendants, required an accounting of profits/expenses, denied rescission of the QSA, and ultimately entered a December 17, 2014 judgment awarding PSM $1,100,563 in restitution (plus fees/costs elsewhere).
The district court relied on Restatement (First) of Restitution § 74, Restatement (Third) § 18, Cal. Code Civ. Proc. § 908, and California cases to justify restitution to PSM (the judgment creditor) for losses it incurred while possessing BAIC.
Multiple post-judgment rulings followed: denial of rescission (QSA), appointment of experts for accounting, an award of post-reversal attorneys’ fees to Defendants under Cal. Civ. Code § 1717, and denial of certain taxable costs for court-appointed experts.
The Ninth Circuit reviewed five consolidated appeals addressing (1) whether a judgment creditor can recover restitution for losses suffered while possessing seized property after reversal, (2) rescission of the QSA, (3) entitlement to post-reversal attorneys’ fees under § 1717, and (4) taxation of costs for court-appointed experts.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether a judgment creditor (PSM) can recover restitution for losses it suffered while possessing property seized under a judgment later reversed	PSM: restitution should restore parties to positions as if judgment had not been enforced; absent bad faith, creditor may recover losses	Defs: restitution doctrine protects the judgment debtor (the party deprived of property); creditor assumed risk by executing on judgment pending appeal	Reversed: creditor may not recover affirmative restitution for losses; restitution doctrine primarily benefits the judgment debtor, not the creditor
Whether the district court properly denied rescission of the QSA	PSM: QSA was necessary to preserve BAIC and should be treated as protective expense or removable under relevant law	Defs: QSA was an ‘‘improvement’’ that enhanced BAIC’s value and need not be rescinded	Affirmed: QSA characterized as an improvement; rescission denied
Whether Defendants could recover post-reversal attorneys’ fees under Cal. Civ. Code § 1717 after judgment obligations were satisfied	Defs: their post-reversal restitution proceedings are “on the contract,” so § 1717 fees are available	PSM: any contractual fee right is extinguished upon satisfaction of the judgment	Reversed: award of § 1717 fees vacated because right to contractual fees is extinguished when judgment is satisfied (Carnes controlling)
Whether the district court abused discretion in denying taxation of costs for court-appointed experts	Defs: experts’ fees are taxable costs and should be awarded given prevailing-party status	PSM: district court properly exercised discretion due to parties’ partial recovery and mutual benefit from experts’ work	Vacated and remanded: with main restitution award reversed, denial of taxing experts’ costs must be reconsidered in light of changed circumstances

Key Cases Cited

Ward v. Sherman, [citation="100 P. 864"] (Cal. 1909) (discusses restitution where property was taken under an erroneous judgment and treats the possessor as a trustee accountable for proceeds and expenses)
Schubert v. Bates, [citation="185 P.2d 793"] (Cal. 1947) (endorsing Restatement § 74 principle that one deprived of property by a judgment is entitled to restitution when judgment is reversed)
Stockton Theatres, Inc. v. Palermo, [citation="264 P.2d 74"] (Cal. Dist. Ct. App. 1953) (addresses restoration of parties after reversed judgments and accounting for income earned during possession)
Gunderson v. Wall, [citation="126 Cal. Rptr. 3d 880"] (Ct. App. 2011) (applies restitution principles to deny restitution of interest where debtor’s misconduct affected the position to be restored)
Carnes v. Zamani, [citation="488 F.3d 1057"] (9th Cir. 2007) (in California law, contractual right to attorney fees under § 1717 is extinguished upon satisfaction of the judgment)